Consumer Groups Assail Rising Penalties on Credit Card Debt

WASHINGTON —  Credit card users who get in over their heads this holiday season face an array of rising penalties that can overwhelm good cheer with the gloom of deeper debt, consumer groups warned Thursday.

A survey released by San Francisco-based Consumer Action and the Consumer Federation of America shows that many banks in recent years have substantially hiked penalties for exceeding credit limits and late payments.

Late fees now average $22 a month, up from $13 in 1995, when the survey was last conducted. That’s an increase of about 70%. Several banks charge as much as $29.

More banks are also imposing whopping “penalty interest” rates of up to 25% on customers who make a couple of late payments in the course of a year. Once the penalty rate is imposed, it can take six months to a year to earn back a lower rate.

And some banks have shortened from 25 to 20 days the grace period in which customers can pay off their balances without accruing interest.

Yet even as merchants begin displaying their Christmas wares, many consumers remain unaware of these potentially costly changes in the fine print of their credit card agreements. Consumers also fail to realize that they can often get banks to drop penalty fees, particularly if the customer has a good payment record.

“There is inadequate disclosure as to what triggers these penalties,” said Ken McEldowney of Consumer Action, speaking at a Washington news conference. “The larger issue is that banks are now expecting consumers who have a hard time making ends meet to provide them with a disproportionate share of income.”

The Consumer Action survey covered 117 cards issued by 74 banks around the country. California suffered some of the steepest increases in late fees because of court cases that undermined state consumer laws. BankAmerica raised its late fee to $25, from $7 in 1995, and Wells Fargo now has a fee of $29, up from $5 in 1995.

Nancy Ness Judy, consumer affairs manager for the American Bankers Assn., responded that the penalties are part of a move by banks to “risk-based pricing,” a carrot-and-stick system that rewards responsible customers and penalizes people who don’t pay on time.

“The bank is trying to change consumer behavior,” said Judy. “It’s like a speeding ticket. You pay a lot of money for a speeding ticket, so it teaches you a lesson.”

As to disclosure, Judy said banks are required by law to provide written notice of changes in credit terms. “Consumers aren’t reading the statements they get now,” she said. “So who’s to say that providing them better information is going to make them read?”

About 6% of credit card customers are delinquent in paying their bills by 30 days or more, according to Ram Research, a Maryland firm that tracks the industry. But computerized billing systems slap a late fee on accounts that are just a few days overdue.

As intense competition forced many banks to eliminate annual credit card fees for all customers, the result has been higher fees for those who don’t abide by the letter of their credit agreements, said Robert McKinley, president of Ram Research.

“Banks can’t charge an annual fee, so they’re making it up on the back end,” McKinley said.

According to the bankers association, penalty fees and related charges accounted for 6% of revenues in 1992. By 1996, that had risen to 14%.

Full results of the Consumer Action survey, including information on individual banks, are available on the Internet at https://www.consumer-action.org.